An Initial Attempt at Pricing an Option

Carl Chiarella*, Xue Zhong He, Christina Sklibosios Nikitopoulos

*Corresponding author for this work

Research output: Chapter in Book or Report/Conference proceedingChapterpeer-review


This chapter uses the concepts developed in Chap. 2 to illustrate the problem of option pricing as a discounted expected option payoff. By assuming that investors are risk neutral and using the Kolmogorov equation for the conditional probability, we demonstrate how the Black–Scholes option formula can be arrived. We also illustrate how the option price can be viewed in a quite natural way as a martingale and the Feynman–Kac formula, two very important concepts of continuous time finance.

Original languageEnglish
Title of host publicationDynamic Modeling and Econometrics in Economics and Finance
PublisherSpringer Science and Business Media Deutschland GmbH
Number of pages17
Publication statusPublished - 2015
Externally publishedYes

Publication series

NameDynamic Modeling and Econometrics in Economics and Finance
ISSN (Print)1566-0419
ISSN (Electronic)2363-8370


  • Discount Cash Flow
  • Kolmogorov Equation
  • Option Price
  • Risk Free Rate
  • Stock Price


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